What Do The Euro Summit Volcanic Eruptions Mean? Pyroclastic Flow Next

London, UK - 24th October 2011, 10:00 GMT

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1. The summits of European leaders and finance ministers happening this weekend appeared to be filled with despair as personal relations amongst major European leaders -- most notably the Germans and French -- collapsed much further. In parallel, Anglo-French relations also deteriorated as British prime minister Cameron became embroiled in a furious row with French president Sarkozy over Britain's role in talks to resolve the euro crisis. The heated exchange between Cameron and Sarkozy was so bad that it held up the conclusion of the EU-27 summit for almost two hours. The French president expressed rage openly in regard to the constant criticism and lectures from UK government officials. Sarkozy bluntly told Cameron, "You have lost a good opportunity to shut up. We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings." Those witnessing the angry exchanges said Cameron insisted that the package being adopted on Wednesday by the 17 eurozone countries had serious implications for non-euro countries amongst the EU-27 and their interests must be safeguarded as well. The European Union is also facing a rebellion from Italy, Spain and other smaller members over "imperious diktats" issued from Berlin and Paris. Post euro summit volcanic eruptions, is a pyroclastic flow next?

Euro Summit Volcanic Eruptions: Pyroclastic Flow Next

2. New EU Treasury? Herman Van Rompuy, president of the European Council, angered many Eurozone countries by making confidential proposals for the creation of a European finance ministry at the same summit. His plan for a unified EU treasury was presented as the only solution to the problem of countries spending more than the euro can sustain, according to many Eurozone officials. This new proposal would mean that a centralised body would be able to override national budgets and enforce cuts on profligate governments. This measure is proving to be highly unpopular already, as it goes much further than any vision of the EU's founding fathers who drew the line at yielding fiscal and military sovereignty of member states. Further, Van Rompuy suggested that the EU finance ministry should be based in either Frankfurt or Paris, giving the indelible impression to smaller EU members that they would be put in a position of submission. From the perspective of most EU members, they might as well conclude that they either do not matter or they do not have a voice.

3. No Grand Solution: Interpersonal relations between eurozone leaders hit an all-time low, reflecting sharp disagreements between Germany and France over using the ECB to bailout the euro and presenting an additional obstacle to finding a "grand solution" to Europe's debt crisis. France originally wanted the fund to be allowed to tap the massive cash reserves of the European Central Bank which is an option that Germany has rejected altogether. Without the ECB's firepower, the options are ugly with too much reliance on leveraging and complex financial instruments -- derivatives and synthetic constructs -- that the EU has previously blamed for causing the initial banking crises in 2007-08.

4. Acrimony: France and Germany remain deeply divided, and it's dawning on everyone there may be no good solution that :

a. Allows the European Financial Stability Facility -- EFSF -- to keep its firepower;
b. Greece to avoid a catastrophic default; and
c. The banks to avoid getting crushed as a result of that default and associated contagion.

5. The deep rift between Paris and Berlin is multi-dimensional and not just restricted to the immediate single currency crisis. It includes matters such as:

a. Management of foreign and defence policy including relations with the Middle East, Russia and Central Europe;
b. Nuclear power phase out in Germany and nuclear expansion in France; and
c. The future of the European common agricultural policy.

Further, both French and German diplomats agree that this is a crisis of leadership and perhaps very mediocre characters are in charge on both sides of the Rhine and Rhone.

6. Words used to describe the Euro summit over the weekend now include:

a. "Grim";
b. "Worst mood ever seen"; and
c. "Complete mess."

7. IMF threatening to extricate itself post grim warnings:

a. A joint report by the EU and the International Monetary Fund (IMF) now warns that, without a default, the Greek debt crisis alone could swallow the Eurozone's entire €440 billion bailout fund -- leaving nothing to spare to help the affected banks of Italy, Spain and France as well as other Eurozone members.

b. Christine Lagarde has said the IMF may no longer be willing to pick up a third of the total bill for rescuing Greece -- a contribution worth €73 billion -- unless European banks were prepared to write off voluntarily at least 50 percent of the Greek debt, although in practice this could easily cross 75 percent, which the market is discounting anyway.

c. France and the European Central Bank (ECB) have both been resisting any talk of a Greek debt default for fear it would damage French banks and rock the stability of their financial institutions. Notwithstanding French objections, a large Greek haircut is now inevitable.

8. Double Whammy and Credit Default Event: European Union leaders are now likely to ask banks voluntarily to accept much bigger losses on Greek bonds to ease the pressure on that country and to raise billions more in capital to bear those losses simultaneously. If the banks were not to submit voluntarily, the Eurozone governments may simply force deep hair cuts, which would trigger a credit default event.

9. Wolfgang Schaeuble, Germany's finance minister, has taken the "I told you so" approach throughout the summit. He did not mince words and strengthened his reputation for harshness. Many European Finance ministers found him to be unbearable. He was the first to call for an "orderly" default for Greece 18 months ago, at a time when the cost of such a move was less than one third of the price today.

10. Francois Baroin, the young French finance minister tried to hit back. He complained that the IMF's default medicine would hit France the hardest because his country's banks are most exposed; and France's "untouchable" AAA rating could be compromised. Christine Lagarde, who held Monsieur Baroin's post until taking up the IMF job, "shut him up" by brandishing the IMF report and pointing to its detailed figures. "She really slapped him down," according to senior diplomats.

Conclusion

Are Merkel-Sarkozy's previous expectations of a big breakthrough during these summits realisable? If an unstoppable force meets an immovable object, what happens? The global financial markets may be advised to expect a pyroclastic flow as a result of the recent euro summit volcanic eruptions.

Do the global financial markets genuinely expect a deal during these European summits? The EU arrogance to attempt usurping the sovereignty of all Eurozone members was bound to reach its destructive apex sooner or later. This said, the Eurozone powers may yet walk back from the brink before Wednesday evening and produce promises of further summits to resolve remaining differences. In this way, the horrible muddle through may continue.

History may record the most significant outcomes of the recent euro summit volcanic eruptions to be:

1. The diminished influence of president Sarkozy in particular and France in general;
2. France having to step back from the common European pool of funds and fixing its colossal banking problems by itself;
3. As a European Union founder country, whatever France enjoyed by way of special handouts from Brussels, may now be compromised;
4. The bitter confrontation of France with Germany without any tangible success is signalling a significant re-alignment of the power structure within Europe;
5. The bitter row between France and Britain in regard to the Eurozone crisis is also going to have monumental ramifications for their joint defence arrangements;
6. Less powerful members of the Eurozone are finally learning that the French-German monopolisation of the European power structures runs counter to their own interests;
7. The enormous gaps which exist between European Union member countries in regard to their domestic political and economic considerations;
8. The marker in the sand when the forces of European fragmentation -- or "Realpolitik" -- began to overtake the forces of cohesion;
9. The recent events highlight perils facing the European "political and economic" Union on the back of the unstoppable forces of Eurozone fragmentation; and
10. Other world leaders -- like those of the US and China -- taking note that there is not much they can do to repair the cracks now appearing within the Eurozone.

Note: In case you are wondering what a pyroclastic flow means... A pyroclastic flow is a fluidised mixture of solid to semi-solid fragments and hot, expanding gases that flows down the flank of a volcanic edifice post eruption. A pyroclastic flow can be a fast-moving current of superheated gas, which can reach temperatures of about 1,000 °C (1,830 °F), and rock -- collectively known as tephra -- which reaches speeds moving away from a volcano of up to 700 km/h (450 mph).

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